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Chorus engages with CFH after report signals risks over broadband build, shares gain

Thursday 5th December 2013

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Shares in Chorus rose after the telecommunications network operator said it will work as quickly as possible to avoid failing its contractual obligations to build the bulk of the country's broadband network if regulated price cuts are enforced.

The Wellington-based company said it will immediately engage with Crown Fibre Holdings, the government entity tasked with overseeing the ultrafast broadband network contracts. It made the comments after Communications Minister Amy Adams said Chorus was at risk of not meeting its commitments if Commerce Commission-imposed price cuts go ahead. The shares rose 0.7 percent to $1.445.

Accounting firm Ernst & Young Australia verbally briefed Adams on whether Chorus can deliver on its contracts, and came to the early conclusion that a 23 percent cut to what Chorus charges for unbundled bitstream access services will have a "significant impact" on its financial position.

"We remain committed to the UFB (ultrafast broadband) and RBI (rural broadband initiative) initiatives, and working to find a solution to the issues as quickly as possible," Chorus chief executive Mark Ratcliffe said in a statement. "As the Crown's cornerstone partner in a large public private partnership, we will engage immediately with Crown Fibre Holdings with regard to opportunities within the contract."

Adams said the government expects Chorus will discuss specific provisions in its contract to build the ultrafast broadband network with CFH, and that the network operator to make up "a significant part" of any shortfall. The outcome of any negotiations will probably take a few months, she said.

"The preliminary conclusion from Ernst & Young is that copper price changes will have a significant impact on Chorus's financial position and that absent further action, Chorus is at risk of not meeting its UFB and RBI contractual commitments, after taking into account a wide range of actions Chorus can take itself," Adams said.

"While the quantum of the shortfall is still being finalised and will be outlined in its final report, Ernst & Young has indicated it is unlikely to alter the high-level findings, and that the government can act with confidence on the information Ernst & Young has supplied," she said.

EY Australia is due to deliver its final report on Dec. 12 after being hired last month to run the ruler of Chorus's books to see if it has the financial capability to deal with an imposed cut to the price of services on the copper lines.

Adams is mulling how to respond to Telecommunications Commissioner Stephen Gale's planned price cut for access to Chorus's regulated copper lines, which the network company says will force an overhaul of its capital structure and may threaten the taxpayer subsidised build of national fibre cable infrastructure.

The government lost its ability to legislate away the problem after its support partners declared they would not back re-writing the law, effectively limiting Adams' options.

This week Prime Minister John Key ruled out slowing down the roll-out of the UFB network, which should be completed by the end of the decade, and wasn't open to injecting taxpayer funds to shore up Chorus's balance sheet.

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